Real Estate Investor Magazine South Africa November 2014 | Page 52

Listed BY WIM PRINSLOO A Non-traditional Form of Real Estate Tower REITs O ne of the non-tradition forms of real estate in the United States are Communication Towers, or “Tower REITs” as we at Reitway Global refer to them. These Real Estate Investment Trusts (REITs) accommodate large US wireless carriers like Verizon and AT&T by supporting their networks and helping to increase coverage and capacity. Closer to home we have Vodacom and MTN renting communication tower space to accommodate their mobile services. A fine business model A very attractive aspect of the Tower REIT business model is the high operating margins generated through new tenant additions. The table below shows that operating costs do not increase materially when new tenants are added to a tower, ultimately causing a significant return on investment for a Tower REIT. Another important argument in favour of Tower REITs is the economic incentives for mobile carriers to rent a tower instead of owning it. Studies in the US have shown that a carrier can save up to $190,000 over five years if they rent a tower. As recently as September 2014, MTN announced the sale of 9,500 of their own towers in Nigeria, with the company noting “increased cost efficiency and optimisation” as the motivation behind the transaction. American Tower and Crown Castle International The Reitway Global Property Fund is currently invested in two US-based Tower REITs: American Tower and Crown Castle International. Both REITs are benefiting from an increase in data traffic on the back of significant technological progress in the mobile phone industry. Smart devices like iPhones and iPads are generating 48 times more data traffic than the more basic older mobile phones. Looking forward, mobile video streaming is expected to grow exponentially due to the popularity of applications like WhatsApp and Netflix. 52 November 2014 SA Real Estate Investor Figure 1: Example of Tower economics Construction costs Tenant Revenue $ 225,000 $ 20,000 Two Tenants $ 40,000 Operating expenses $ 12,000 $ 13,000 Gross Margin Gross Margin (%) Return on Investment $ 8,000 40% 4% $ 27,000 $ 46,000 68% 77% 12% 20% Source: American Tower Corp. One Tenant Three Tenants $ 60,000 $ 14,000 RESOURCES Reitway Global www.reimag.co.za